Thursday, February 26, 2009

Microsoft R&D Investment

Microsoft made a splashy public announcement that they are going to up their R&D investments in the face of the overarching financial meltdown and cyclical technology spending slowdown. That's the kind of message that we like to see--the company plans to thrive on the other side of this cycle and is being opportunistic because it has the resources.

What's not clear to me is how to look forward and think about the value creation from these expenditures. Microsoft's history of innovation and market creation, beyond SQL server, has been lackluster. Their desktop monopoly and the ever more expensive, bloated Office suite are still the bedrock of the company's cash creating abilities. If, at one point, they were willing to splash out cash for Yahoo! or for its search business, and now they have gone on to higher R&D spending, is this just a second best alternative?

Google, by contrast, with their 20% time allocation for staff engineers to spend on high concept projects seems to have yielded a panoply of applications, including Google Maps, that really sets the company apart and gives it a wide reach into potential downstream revenue opportunities.

This was a nice communication of commitment and strength from Microsoft, but it could have used more beef to finish the message and to answer the question, "Why am I, as a shareholder, going to better off as a result of this R&D spend?"

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